Uganda’s shilling is bearing the brunt of rising US yields and foreign-investor selling as offshore holders trim their exposure to local-currency bonds.
The shilling plunged to 4,143 per dollar as at 4:56 p.m. in Kampala, its weakest level since at least 1993, when Bloomberg began tracking the currency. The drop took its decline since a selloff in US Treasuries began on Aug. 25 to more than 10%, the steepest among 144 currencies tracked by Bloomberg.
US yields are “a factor and that is what is driving the outflows from the local bond market,” Stephen Kaboyo, managing director of Kampala-based asset manager Alpha Capital Partners, said. Last week’s debt auction saw demand mostly come from local banks and pension funds, he said.
Citigroup Inc. estimates that more than $200 million has flowed out of Uganda’s markets over the past two weeks, as the country’s current-account and fiscal balances remain under pressure.
“Without a stabilization in the currency, investor confidence looks likely to remain fragile,” wrote Katie Kironde, a strategist at the Wall Street lender.
The Bank of Uganda didn’t immediately respond to an emailed request for data on local currency bond holdings by foreign investors.
Kaboyo also attributed the shilling’s weakness to domestic factors, including elevated corporate demand for dollars and higher energy costs stemming from supply disruptions linked to the wars in Iran and Ukraine.
The “next testing point” is 4,150 shillings per dollar, suggesting the currency may weaken further in the coming days, Kaboyo said by text message from the capital.
Still, authorities aren’t likely to intervene in the currency markets, after President Yoweri Museveni ordered the central bank not to sell dollars.
“I am totally against” the central bank governor’s “proposal to squander our reserves and deploy more dollars in the market to counter the falling shilling,” Museveni was quoted as saying Oct. 9 by local media .
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The International Monetary Fund estimates the East African nation has $6 billion in foreign-exchange reserves, enough for about 2.7 months of import cover.
Across Africa, frontier economies including Zambia and Ethiopia are deploying FX reserves to support their currencies which are also facing renewed pressure. Zambia’s central bank is selling dollars to defend the currency from further declines, Kironde said.
Ethiopia last week announced plans to spend an additional $840 million this year to support the birr, after already deploying more than $3 billion to defend the currency.
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